U.S. Encourages Allies to Replace Iran's Oil Exports

With renewed American sanctions on Iran's energy sector set to take effect in November, the Trump administration has called on its allies in Saudi Arabia to boost output and keep oil prices under control. In a recent interview, Crown Prince Mohammed Bin Salman said that Riyadh has more than accommodated this request, and now exports "as much as two barrels for any one barrel that disappeared from Iran recently."

American oil production is rising, but not quickly enough to offset the near-disappearance of Iranian oil from the global market. Saudi Arabia is the only producer with enough swing capacity to fill the expected gap once sanctions take hold, and Bin Salman told Bloomberg that Riyadh and its partners have more than offset the recent declines in Iranian exports. He suggested that Saudi fields can produce an additional 1.3 million bpd if needed, nearly enough to offset recent Iranian exports of 1.7 million bpd.

Non-compliance will also help to close the gap. Japan and South Korea are halting their purchases of Iranian crude, and China has been slowly reducing its imports, but Indian oil minister Dharmendra Pradhan said Monday that his nation has no plans to stop. Indian state oil companies currently purchase about 330,000 barrels per day from Iran, equal to about 15 percent of Iranian exports. After U.S. sanctions take effect, instead of paying in dollars - which would be forbidden - India may buy Iranian oil in rupees. Pradhan acknowledged that there is no certainty that the Trump administration will grant New Delhi a waiver for its purchases.

Tanker rates

The reduction in Iranian oil exports is creating a boom for dirty tankers after a long period of weak rates. According to Bloomberg, spot rates for VLCCs serving the Asian market doubled between late September and early October, corresponding with a sharp week-to-week drop in Iranian exports. Longer voyages from supply sources in West Africa and the United States to Asia means a higher demand for ton/miles, bringing tanker owners a welcome hike in rates.

“West Africa chartering activity is strong as key Asian buyers have started to look elsewhere to replace the Iranian volume," said Morgan Stanley analyst Fotis Giannakoulis in a research note on Sunday.